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The government can reduce the country’s average electricity generation cost significantly by reducing the domestic price of furnace oil for BPDB alone in line with the international market, a top official said on Sunday.

Around 72 per cent of the country’s total oil-fired power plants generate electricity using furnace oil, he said.

Currently, the country has a total of 39 oil-fired power plants, of which 28 plants, having the generation capacity of 2,133 megawatts (MW) are furnace oil-fired, and 11 plants with the generation capacity of 854 MW are diesel-fired.

The state-run Bangladesh Power Development Board (BPDB) has estimated that the country’s average electricity generation cost will decline by Tk 0.50 per unit (1 kilowatt-hour), if the government reduces the purchase rate of furnace oil to Tk 45 per litre from the existing Tk 60 per litre, a senior BPDB official said.

The BPDB has made the estimation in November last, considering the furnace oil price it pays to the privately-owned oil-fired power plants, which import furnace oil at their own arrangement to run their plants, said the official.

After paying 9.0 per cent service charge to private sector against import of furnace oil BPDB was paying them Tk 45 per litre.

But in the international market the prices of oil have been declining continuously and the Brent crude, the benchmark price for global oil, slumped by over 50 per cent to below US$50 per barrel, the lowest level in last six years in November last.

BPDB is currently purchasing furnace oil from BPC at Tk 60 per litre, much higher than the import cost, and is supplying it to the power generation companies to generate electricity. This practice ultimately pushes up the electricity generation costs, said sources.

BPC’s furnace oil import cost is currently around Tk 37 per litre after paying value-added tax (VAT) and relevant import duties, said a BPC official.

The state-run corporation pays around Tk 8.30 per litre as VAT and import duty for furnace oil. Had the VAT and import duties been waived from BPC, the import cost of every litre of furnace oil would have been below Tk 30 per litre, he also said.

BPDB, the country’s lone electricity buyer from the generation companies, is purchasing diesel from BPC at Tk 68 per litre, about Tk 11 higher than the imported cost.

BPDB is purchasing petroleum products from BPC at higher prices in line with the government decision.

If the government reduces the buying price of furnace oil from BPC, the subsidy in electricity sector would also reduce drastically, said the BPDB official.

The corporation is making profit of around Tk 11 per litre against its diesel sales, he added. BPC imports around 1.0 million tonnes of furnace oil from the international market, and sells it to BPDB for electricity generation in oil-fired power plants.

It imports around 3.0 million tonnes of diesel per year on an average to meet mounting local demand, including that of the oil-fired power plants.

Despite lower import cost of petroleum products, BPDB along with other state-run electricity distribution companies has sought further hike in electricity prices.

They have submitted proposals separately to the Bangladesh Energy Regulatory Commission (BERC) to hike retail electricity tariff ranging from 14.75 per cent to 18.50 per cent.

BPDB has sought a hike of electricity tariff at bulk level by 18.12 per cent or Tk 0.81 per unit.

The recent decline in oil prices is likely to have a major, largely positive impact on the global economy – even greater than most observers seem to recognize. Indeed, if governments take advantage of lower oil prices today to implement critical energy-policy reforms, the benefits may improve structural features of their economies tomorrow.

A key reason why the price decline’s impact has so far been underestimated is that nobody knows how long it will last. And, indeed, past price movements provide little guidance in this regard. When prices plunged in 2008, they shot back up almost faster than experts could say “new normal”; after the 1986-1987 drop, prices remained low for a decade and a half.

This time, the price trajectory is likely to be determined by a new player in the energy game: shale oil. The marginal cost of shale-oil production (the expense of continuing to pump an existing well) varies from $55 to $70 per barrel. Add a $5 profit margin, and the oil-supply curve now has a long, near-horizontal segment in the range of about $60-75 per barrel. Regardless of demand, this will be the natural nesting range for the price of oil – call it the “shale shelf” – and will likely remain in place for a protracted period.

This provides some insight into OPEC’s decision last November not to curtail supply. Saudi Arabia correctly reasoned that cutting output would not boost prices, but simply concede space for new players to step in and grab market share.

Of course, this pattern could be disrupted, if, say, a war or major conflict in an oil-exporting region constrained supply enough to cause prices to spike beyond the shale shelf. But, in the absence of a major unexpected shock, oil companies will remain under pressure to continue selling oil, even at low prices, as they struggle to service the large debts they incurred on investments when oil prices were high. This pressure is precisely what drove oil prices so low in December and January.

Given this, it is reasonable to expect the oil supply to remain plentiful, and prices to remain moderate, through 2016 – a trend that will boost global growth by an estimated 0.5 percentage points over this period. The impact will be especially large for countries like India and Indonesia, where the bill for oil imports amounts to as much as 7.5% of GDP. In fact, India’s current account, which has been in deficit for years, is likely to record a surplus this year.

But advising countries simply to lower subsidies is often meaningless. In countries where the government dictates gas prices – like India and Indonesia did until recently (and, to some extent, continue to do) – lower market prices would reduce the subsidy automatically. That is why holding down subsidies is inadequate for such countries.

The goal should be to shift from a fixed-price system, with occasional government-decreed adjustments, to a market-based price regime, in which the government makes a credible pledge not to limit prices, with the exception of pre-defined extreme circumstances. While such a move would have a negligible effect on prices now, it would provide countries with a huge advantage during future oil-price fluctuations, because consumers and retail suppliers would no longer be cut off from price signals.

Amid all of this good news, two serious concerns stand out. In the short run, declining oil prices create grave challenges for those who, having invested in expanding production when prices were high, now face large costs and failing businesses. More problematic, lower oil prices encourage excessive consumption – the long-term environmental impact of which will be compounded by the weakening incentive to invest in alternative energy sources.

Policymakers must recognize these risks, and implement policies to mitigate them. Specifically, governments should divert the money they save on oil and subsidies to targeted programs aimed at helping people escape poverty, and they should incorporate into their tax regimes incentives for innovation and investment in clean energy.

With the correct approach, today’s oil-price volatility could turn out to be a critical turning point on the path toward a more sustainable future, characterized by shared prosperity and genuine progress on poverty reduction. The direction to take is clear.

।। The price fall of oil on the international market was believed to be blessing for getting rid of subsidies, but higher payments in subsidy for the Bangladesh Power Development Board are offsetting the relief.

The government earmarked PDB subsidy at Tk 60 billion. The largest private independent power plant (IPP) situated at Meghnaghat has been laid shut for long, resulting in purchase of quick-rental electricity at much higher rates.

For this reason, the government exchequer has to pay a minimum of 20 per cent higher subsidy to foot the bill for such costly power purchase.।।